NBZ, Inc. v. Pilarski - 185 Wis. 2d 827, 520 N.W.2d 93 (Ct. App. 1994)

Rule:

Covenants not to compete are subject to common law contract principles as well as Wis. Stat. § 103.465 requirements.

Facts:

Studio 890, a beauty salon in Wisconsin, hired Paula Pilarski and placed her in its training program. While Pilarski was still in training, the parties executed an “Employment Agreement and Commitment” and an “Agreement not to Compete.” The covenant not to compete provided that Pilarski would be restricted for one year after employment termination from competing within a five-mile area of the employer's place of business. Pilarski finished the training program and became a hairstylist at the salon in 1989. In 1990, Pilarski left Studio 890 and began working at another salon within five miles of Studio 890. Consequently, Studio 890 brought an action against Pilarski for a permanent injunction requiring her to terminate her employment at Henry Steven's Salon. The trial court dismissed the action, holding that under Behnke v. Hertz Corp., 70 Wis.2d 818, 821, 235 N.W.2d 690, 692 (1975), covenants not to compete must be supported by consideration and that the covenant executed in this case was not supported by consideration. The trial court further held that the covenant was not valid under § 103.465, STATS., because it was not reasonably necessary for the protection of the employer. Studio 890 appealed, arguing that  § 103.465 abrogated the common law requirement which required restrictive covenants in employment contracts to be supported by consideration.

Issue:

1. Did § 103.465 abrogate the common law requirement which required restrictive covenants in employment contracts to be supported by consideration?
2. Did the trial court err when it found that there was no consideration for the execution of the covenant after the employment began?

Answer:

1) No. 2) No.

Conclusion:

Acknowledging that Wis. Stat. § 103.465 upheld noncompetition covenants if reasonable, the court disputed the contention that the statute abrogated the common law requirement that covenants be supported by consideration. While the statute was silent on this issue, the court explained that abrogation occurred only if the statute clearly provided. Further, the court observed, continued employment of Pilarski by Studio 890 did not constitute consideration because continuation was not conditioned upon signing the agreement; other employees were not approached to sign. The court found the noncompetition restriction unnecessary to protect Studio 890’s relationship with customers because Studio 890’s revenues were minimally attributable to Pilarski. The court concluded that Pilarski’s appeal was not frivolous under Wis. Stat. § 809.25(3), because no corresponding argument was made that the suit was initiated in bad faith.